Author Topic: How much house can I afford?  (Read 7146 times)

randy7

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How much house can I afford?
« on: March 18, 2015, 09:10:12 PM »
I am 26 years old living in a major city and I work in tech making about 70k a year. I have decent size investment account that i have amassed through some more than lucky investments.  I'm just curious how much house I can realistically afford while still being comfortable?  Or how would you better diversify the assets that are tied 100% in the markets. 

Current Assets:
401k: 30k
taxable brokerage: 270k

Monthly expenses:
Roughly $2,000 a month including rent

Any quick advice would be greatly appreciated!

Thanks

HenryDavid

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Re: How much house can I afford?
« Reply #1 on: March 18, 2015, 10:22:16 PM »
Wrong question.
Ask: what is the shelter arrangement that will allow for a reasonably comfortable life while requiring the least resources?
Might not be a house. Might be shared. Might be rented. But "I can afford it" is the beginning of all kinds of trouble.
I can currently "afford" way "more house". But it won't improve my life.

jmusic

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Re: How much house can I afford?
« Reply #2 on: March 19, 2015, 12:47:51 AM »
That really depends on your plans for the future.  You're 26, I'm guessing you're not married.  Are you planning on getting married and having kids?  If so, then you may want to wait until you have a significant other and make the decision together.  If you don't have marriage aspirations, then renting affords more flexibility.  Don't like the neighbors?  Want to move to another city?  Job location change within the company and don't like the new driving distance?  Renting gives you the flexibility to move at only 30 days notice if your lease is up.

Also, your $2k/mo payments are rather highish; I'm in San Diego so I'm no stranger to high prices.  Maybe consider moving to a cheaper place or getting a roommate? 

MrsPete

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Re: How much house can I afford?
« Reply #3 on: March 19, 2015, 06:19:22 AM »
No, I think he's asking the right question -- because he tempers it in the post, asking what he can "realistically afford while being comfortable".  He's not asking for the answer a real-estate agent would give; that question would be interpreted as, "What's the absolute maximum I can spend? And screw everything else in the world."

I assume the poster is smart enough to have determined that he wants to stay in his current location, and he is motivated to buy a house -- and in the long run, that's likely to be the best option.  We paid off our house more than a decade ago, and it has been wonderful in several ways to OWN (not mortgage) our own home.  It's allowed us to save so much.  My husband is threatened with lay-offs on a regular basis, and because our expenses are so low, we wouldn't be in any trouble at all keeping afloat with my small salary -- even in a few months, when we have two college kids.  And owning your own home, knowing it's YOURS is worth a great deal emotionally; perhaps people who grew up in financially stable homes don't quite "get that", but I sure do.

OP, I think your question is very location-specific.  I suggest you start by deciding in which area of your city you'd most like to buy -- then start trolling the area.  Walk or drive around, checking out what's for sale /how much it costs.  Check the area at different times of day.  Develop a feel for what houses in that area go for and how often they become available. 

You can find online calculators that will tell you "how much house you can afford".  Look at them, and then figure you should spend 50-60% of what the establishment says you should spend.  We did that with our first house, and we were so glad we did; if we'd spent what the banks said we should have spent, we would've been in trouble when the children came along. 

Make three lists:  Things you MUST HAVE in a house, things you'd LIKE TO HAVE in a house, and things that are NOT ACCEPTABLE.  Keep this in mind as you look at houses.  Since you're young, I suggest you keep flexibility at the top of your list.  It'd be great if you could buy something now and rent some of the rooms to roommate ... then expect to take back those rooms when you get married and have a family.  Or look for a small house that could be expanded at some point in the future (though you shouldn't overlook the significant cost of expansions).  I'd also suggest that you really focus on the FUNCTIONAL rooms of the house:  Does it have a decent-sized laundry room, plenty of storage space in the kitchen, bathrooms that work, ample storage thoughout?  Living rooms and bedrooms can usually be altered pretty easily -- it's those "working areas" of the house that drive you nuts if they're not right. 

Finally, don't be in a hurry to buy a house.  A poorly chosen house will be worse than owning no house.  In the meantime, keep saving -- ideally you'd be able to put down 20% or more and avoid PMI insurance. 


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Re: How much house can I afford?
« Reply #4 on: March 19, 2015, 06:22:22 AM »
I read the $2,000 a month as being all expenses, not just rent, which isn't unreasonable on the OP's income.

Big mistake to ask what you can afford in housing: that's how the 2007/8 crash happened: the banks told people they could afford to borrow more and more, and eventually it all came tumbling down.

If you are settled in your current location and want to buy, I don't see a problem: just make sure that it is something which will rent or sell when you want to move on (you may spend the rest of your life in a home you buy at 26 but you don't want to be compelled to).  3 times salary with a 10% deposit used to be the standard affordability test for buying with a mortgage when I first bought in the UK several decades ago.  Another way to look at is: spend about one-third of your income on housing costs.

Pigeon

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Re: How much house can I afford?
« Reply #5 on: March 19, 2015, 06:41:02 AM »
I think finding a house that you plan on staying in for some time makes a great deal of sense.  Moving is expensive.

It's hard for strangers to say how much you should spend.  There are too many variables.  Are you buying this as a single person and  planning to live there alone?  How much do you want to be saving out of your salary?

I agree with MrsPete that you absolutely don't want to look at the calculators or take the advice of realtors who will tell you to spend the absolute most that a bank will qualify in mortgage loans.  Try to find something livable for some time, but well within your means.

mak1277

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Re: How much house can I afford?
« Reply #6 on: March 19, 2015, 09:10:21 AM »
One frame of reference I would use is to look at what you're paying in rent and not exceed that with your PITI payment on a mortgage.  It's harder to do if you're renting a single room or have roommates, but you can look at how much space you have no vs. what you'd get when you buy.  With interest rates being super low, it shouldn't be too hard to reduce your monthly cash outflow.  Obviously this is very location dependent, so YMMV.

Livewell

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Re: How much house can I afford?
« Reply #7 on: March 19, 2015, 09:38:16 AM »
randy7,

Personally, at 26, I would just get some roommates and save more (and have some fun).  No need to buy so young, so many things can change between now and when you are in your early 30s (I bought my first house with my wife at 31).

Only exception would be if it was 2009 and the market had crashed - then maybe it would be worth it.  Keep saving and investing, the fact that you are on this forum says your future is bright! 


if you haven't read jlcollins yet, you should soon:   http://jlcollinsnh.com/stock-series/

he also has a good post on housing http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/

Bob W

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Re: How much house can I afford?
« Reply #8 on: March 19, 2015, 10:00:10 AM »
randy7,

Personally, at 26, I would just get some roommates and save more (and have some fun).  No need to buy so young, so many things can change between now and when you are in your early 30s (I bought my first house with my wife at 31).

Only exception would be if it was 2009 and the market had crashed - then maybe it would be worth it.  Keep saving and investing, the fact that you are on this forum says your future is bright! 

+1

Most people focus on the upside of buying homes.  But especially in the SF market there is potential for a huge downside potential.   Let's say you buy a 400K house with 20% down. (80K)  Then lets say the market goes south as it often does in California and home prices drop 30%.   Your 400K house is now worth 280.    You have to sell, because hey,  the economy tanked and jobs went away.   Or you fell in love with someone in Chicago and gotta move.   Your net loss is $125K after commissions.   You have lost your initial 80 and another 45K.  Real estate is one of the few things you can actually lose more than you put in.

But I concur  with others that at your age and situation home ownership should be a distant thought.   Roommates can be a welcome input into your life. 

Remember ---- "you don't own a house.  It owns you."

Course the flip side is that you buy at 400K and in 3 years you sell for 700K and look like a freaking genius.   

As far as what you can afford.  Bob's rule is never buy a house that cost more than you have in cash and liquid investments.  In your case around 300K.   Then do not pay cash!   Keep the money invested with a minimal down payment.   Over the long haul at today's rates the spread will be around 5-6% vs. paying cash.  That adds up to serious money. 

If you do buy, consider setting it up as an AirBnB for temp tech people.  You could have a room dedicated to techy stuff for their use and a private kitchen area etc.   You might end up with folks renting the space for weeks or months at a time and net more than your mortgage.    That would certainly increase the resale value significantly as other folks in your situation would jump at the chance to own a property that has positive cash flow.   

It would also be a cool networking opportunity. 

 Remember 300K is your top at this point.  Want more,  save more. 

Best of luck. 


if you haven't read jlcollins yet, you should soon:   http://jlcollinsnh.com/stock-series/

he also has a good post on housing http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/

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Re: How much house can I afford?
« Reply #9 on: March 21, 2015, 11:27:32 AM »
Wrong question.
Ask: what is the shelter arrangement that will allow for a reasonably comfortable life while requiring the least resources?
Might not be a house. Might be shared. Might be rented. But "I can afford it" is the beginning of all kinds of trouble.
I can currently "afford" way "more house". But it won't improve my life.

Basically I concur with this.  Think through what you want in a home AND what you know you want to avoid, make a list and go forth to nail the best deal you can get.

AND... knowing what I know now, I would make my ranking of potential purchases first based on location, second based on the property overall, and lastly based on the particulars of the structure itself.  This goes even for a condo.

Good luck.

phillyvalue

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Re: How much house can I afford?
« Reply #10 on: March 21, 2015, 12:33:26 PM »
Others have covered many good qualitative points. The math of how much you can afford is very subjective, as it is tied to your personal spending habits and also how much you are comfortable spending vs. saving. The math involved will also depend on your tax bracket and also local/state tax rates (income as well as property taxes), which can vary substantially. That said, math like this is pretty reasonable:

-You want your monthly total payment to be covered, say, 50X by your annual gross income.
-This puts you at monthly total payment of $1,400 [to cover P&I, insurance, and property taxes]
-Assuming property taxes of 1% of home value and homeowners insurance of 0.3%, so 1.3% total.
-Assume a 30-yr mortgage at 3.9% with a 20% downpayment.

Based on these assumptions, you could afford a $289,000 house, which would give you a $231,000 mortgage. The mortgage payments would be $1,090/mo and insurance/taxes would be about $310/mo, for a total of $1400. This does ignore maintenance on the house; if you build in $100/mo of maintenance, you'd need to reduce your budget by approx $15-20K [down to $270K or so] in order for the $1400/mo to still be accurate.

Then, whenever doing a calculation like this, you can stand back and ask if it passes a sanity check. A person making $70K brings home something like $4200/mo, again depending on area you are living. The $1400/mo assumption means you spend 1/3 of post-tax income on housing, which is reasonable, although maybe not by MMM standards. That said, when you incorporate tax advantages from interest deduction, it becomes less than 1/3 so you would be well covered.

Anyway, basically this is the framework you can fill in, using your own assumptions.

« Last Edit: March 21, 2015, 12:44:33 PM by phillyvalue »

vern

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Re: How much house can I afford?
« Reply #11 on: March 21, 2015, 02:32:00 PM »
Shoot for less than half of what the banker/realtor tell you that you're qualified for.

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Re: How much house can I afford?
« Reply #12 on: March 23, 2015, 06:59:31 AM »
Shoot for less than half of what the banker/realtor tell you that you're qualified for.

That's a very good rule of thumb.  Reminds me of when we were looking for a house in Maryland while still owning a house in Florida.  When the banker told me how much we were pre-qualified for on a Maryland house, I asked how our existing Miami mortgage impacted that.  "Oh, that's all right," she said. "You can afford both mortgages."  Yea, right.  In a pig's eye.